New rules for the taxation of film production, and in particular a new enhanced tax relief for the production of British films, were introduced by Finance Act 2006. They apply to films which commenced principal photography on or after 1 January 2007 and to British films starting principal photography before 1 January 2007, but uncompleted then.
This follows an announcement by the Chancellor at Budget 2005 that the Government would replace the previous film tax reliefs with a new regime aimed directly at film makers. The Government remains committed to creating the conditions for the sustainable production of British films and recognises the cultural and economic benefits that they bring by providing generous levels of support to makers of British films.
The relief builds on new rules for calculating the profits and losses of film production companies for tax purposes. The new rules, like the ones which they replace, apply to all film production companies whether or not they are producing films intended for release in the cinema.
Over the past nine months HMRC has published draft guidance on the new rules, giving detail about how the relief is intended to operate in practice, Final Draft Guidance will be published shortly.
The relief is aimed directly at film production companies and is not available to those whose only involvement in film making is confined to providing or arranging finance.
In order to qualify for the relief, a film must meet three conditions. It must:
The rates and levels at which the relief would be provided were announced in the 2005 Pre Budget Report. British films costing £20 million or less will be eligible for an additional tax deduction of 100% of qualifying UK expenditure and to surrender losses in exchange for a cash payment of 25%, amounting to a benefit worth at least 20% of qualifying production costs. Other British films will receive an additional deduction of 80% of qualifying UK expenditure and will be able to surrender losses in exchange for a cash payment of 20%, amounting to a benefit worth typically 16% of qualifying production costs.
The Pre Budget Report also announced the updating of the underlying tax treatment of films to provide a firm foundation for the new relief.
Relief for British film production was previously provided by sections 40A to 43 Finance (No.2) Act 1992, section 48 Finance (No.2) Act 1997 and sections 130 to 144 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). A review of these reliefs concluded that they were no longer an effective means of delivering the Government’s objectives for the British film industry.
